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How Executives Can Be a Catalyst for Better Decision-making: Weekend Reading

Research has found decision-making is often subject to biases and irrationalities that get in the way of making good choices, a dynamic that occurs even in highly structured business environments where analytical reasoning dominates, and that can produce flawed outcomes—the kind that can lead to negative impacts on revenue, profits and shareholder value.

Chip Heath, professor at the Graduate School of Business at Stanford University, and Dan Heath, a senior fellow at Duke University’s Center for the Advancement of Social Entrepreneurship, suggest that there is a way for senior executives and other executives to overcome these obstacles and systematically improve decision-making. The Heaths are co-authors of the national best-selling books Switch and Made to Stick, as well as Decisive: How to Make Better Choices in Life and Work. In this interview, Steven Ehrenhalt, principal with Deloitte Consulting LLP and global leader of Deloitte’s Finance Transformation practice, asks the Heaths how senior executives can improve both their own and their organizations’ decision-making.

Steve: In your book, Decisive, you cite studies showing that decisions at the highest levels at companies are often subject to irrational thinking and biases that produce less than optimal choices. What can C-suite executives do to address flawed decision-making?

Chip: Being a good decision-maker requires being disciplined about the way you make decisions, and that means using a decision-making process that corrects the flaws in our decisions that have been identified by psychologists and behavioral economists. The process doesn’t have to be time consuming, but it does have to be used reliably—for example, disciplined decision-makers ask themselves, “Why might we be wrong about our preferred course of action?” Due to the inherent biases we are prone to, it’s never going to be natural to ask that question. A study by Matthew Hayward and Donald Hambrick¹ of Columbia University, for example, found that companies tend to overpay for acquisitions when their CEO recently received positive attention in the media. It’s easy to start believing your own press.

Steve: Are big data and advanced analytics the answer to overcoming irrationalities and biases in decision-making?

Dan: No, data alone does not guarantee a good decision. In fact, a great surplus of data can be a kind of trap because it makes it tempting to cherry-pick the findings that support your point of view. Think about how easy it would be, for instance, to build a case for a particular acquisition if your gut was strongly in favor of it. Any executive could make quick work of an assignment like that. But what psychologists tell us is that we’re often doing just that—gathering information that flatters our beliefs—and we’re not even aware of it. That’s why a good process can provide guardrails: By forcing us to consider contradictory information, by inspiring us to consider multiple options at once, by prodding us to consider the risks and the uncertainties in our choice and so on.

Chip: In Decisive, we boil down some of the most important concepts of disciplined decision-making into a four-step framework that C-suite executives can employ to overcome some of the biggest obstacles to making good decisions. We use the acronym WRAP: Widen your options; Reality-test your assumptions; Attain distance before deciding and Prepare to be wrong.

Steve: How can C-suite leaders apply the ideas embodied in WRAP to improve their decision-making?

Chip: A big challenge is to avoid framing a decision too narrowly. According to studies, about 70% of the time, top leadership teams spend their time debating “whether or not” to pursue a single option–be it on a business strategy, IT project or capital investment. There’s good research that says if you consider a few options—and if you consider them simultaneously—you’re going to have a better outcome.²‚³ Widening your options may be the single most important strategy you can adopt as a senior executive to improve your decision-making. And we’re not saying you have to consider a ton of options—we’re saying consider two rather than one. One study⁴ found that when an executive team added a second option, they were six times more likely to reach a very good decision.

Dan: That could be a counter-intuitive finding for many in the C-suite, where executives worry that the world moves too fast to permit the consideration of multiple options. People might feel that widening options hampers their ability to be nimble. But an important study of Silicon Valley CEOs by Kathleen Eisenhardt, professor of Strategy and Organization at Stanford University, found that CEOs who regularly considered multiple options made not just better decisions, but faster decisions, too.⁵ That’s a surprising finding. It happens for three reasons: First, considering multiple options gives you the chance to gain a more complete understanding of the dimensions of the issue, which boosts your confidence in making a decision. Second, juggling multiple options seems to de-politicize decisions, making them less prone to the “us vs. them” camps that emerge so often when only a single option is considered. Third, having multiple options provides a built-in fallback plan that can be acted upon in case your primary choice falls through.

Steve: How can senior executives apply this concept of widening their options to decisions that seem to require whether-or-not choices?

Chip: Whether-or-not decisions can almost always be transformed to consider multiple options. For example, on an IT project, executives can say, “I don’t want just your baseline proposal.” Instead, they can ask the IT group, “What would the IT plan look like if you had only two-thirds the budget? What if you had 10% more than you asked for?”’ By forcing people to think through both “buy up” and “buy down” options, you’re going to get richer information than if you’re asking, “Should we fund this or not?” And executives are in a good position to see a range of projects across the business, asking, “If we green-light this project, what is the opportunity cost of that? What could we have done with those funds otherwise?” A hospital executive can compare the value of investing an additional million dollars toward a new operating room, or increasing the current advertising spend or adding a new detox unit.

Steve: What are some of the challenges in shifting to a multiple option decision-making framework and how can executives help address them?

Dan: Here’s what makes it hard: Getting stuck in a narrow frame is actually an unfortunate side effect of focusing carefully on something. So you find yourself analyzing one particular investment or project, and as a result of that diligent attention, you start to lose your peripheral vision. You fall into that “whether-or-not” trap that Chip discussed earlier. That’s why it’s helpful to get in the habit of multi-tracking your options. Part of this is cultural: You need an environment where your colleagues and direct reports feel comfortable airing their opposition or surfacing new alternatives. There’s a great quote from Alfred Sloan, who ran General Motors for many years. At a particular committee meeting, he said, “Gentlemen, I take it we are all in complete agreement on the decision here?” And all the committee members nodded. He said, “Then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what this decision is about.”⁶

Chip: And there are some simple questions that can help you widen your options. One of our favorite discoveries in Decisive is what we call the Vanishing Options Test: “If the options we’re considering were suddenly off the table, what could we do instead?” Often when decision-makers run that test it only takes them five minutes to surface a brilliant option they hadn’t even considered before because they got stuck analyzing and debating the very first option that seemed credible. For the “Prepare to be wrong” element of the WRAP framework, it’s also important to look at a decision from the perspective of the future by asking, “If we turned out to be dead wrong on this decision, how could we have predicted that?” Asking that question often tells you where to look for information right now that might warn you you’re about to make a mistake. Then you can go collect the information so you’re less likely to head down the wrong path.

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Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.